Effects of Increase in Rig Count

Last week, Baker Hughes (BHI - Analyst Report) reported that the U.S. rig count increased by 23 to 899 rigs. The domestic rig count had peaked at the end of August 2008, reaching 2,031 rigs, falling steadily thereafter for 38 out of the last 41 weeks.

While rig count increased from the previous week (ended on June 12), it is down by 1,007 rigs compared to a year ago, marking one of the worst downturns in the industry history.



Source: Baker Hughes U.S. Rig Report for 6/19/2009

The rig count increase last week was the first during 2009 since a four-rig gain experienced during the first week of the second quarter. The rig count gain last week was entirely onshore while the offshore rig count actually fell by one.

This would suggest land drilling is continuing at a healthy pace, and it may be a turning point for land drillers such as Nabors (NBR - Analyst Report) and Patterson-UTI (PTEN - Analyst Report), on both of which we have a Sell recommendation.

Our recommendation reflects their exposure to the weak demand outlook for North American land drilling following unfavorable developments in natural gas' supply-demand fundamentals.

We remain wary of oilfield service providers such as Halliburton (HAL - Analyst Report) and BJ Services (BJS - Analyst Report), given our weak outlook for the North American pressure pumping market. The increase in rig count may also prove positive for them as demand for oilfield services closely tracks the overall rig count, which in turn reflects spending plans by E&P players.

However, we remain skeptical of the sustainability of recent enhancement of active rig count.